Jeff Salway: Sipps leave bitter taste in the mouth

Investors with cash deposits in self-invested personal pensions (Sipps) can expect providers to slash interest rates even further over the coming months. Many investors hold large cash balances in their Sipps despite the paucity of the returns paid on those deposits. Now those interest rates may be about to fall again, due to new capital rules for banks that could well have a significant knock-on effect for Sipps. The impact on Sipp investors depends on a decision by the Prudential Regulatory Authority (PRA) that will be announced in March or April. Royal Bank of Scotland announced last Autumn that by March it will no longer pay interest on cash accounts linked to Sipps, and other banks are expected to follow suit. Investors already get meagre returns on Sipp deposits, partly because providers take hidden margins on client cash accounts. The Financial Conduct Authority (FCA) estimates that Sipp firms make about £60 million a year from retained interest charges that aren’t included in figures sent to customers. The result is that projections are overstated and charges are understated, said the FCA, giving Sipp firms an unfair disadvantage over other types of pensions and making it difficult to compare different options. “Few Sipp investors, even after reading their provider’s literature, would be aware that some interest was being retained (effectively as another charge),” said Brian Steeples, director and chartered financial planner at the Turris Partnership in Glasgow. “Providers need to communicate this more prominently and not in a sub-section of a quasi-legal Terms and Conditions booklet.” The regulator, which estimates that about 10 to 12 per cent of money in Sipps is held in cash, wants Sipp providers to begin disclosing their retained interest charges. “Despite low interest rates, many consumers do keep high Sipp cash balances,” said Iain Wishart, managing director of Edinburgh-based Wishart Wealth Management. “Perhaps they are very cautious or wish to buy a commercial property in the future, or maybe even they have one eye on taking their 25 per cent tax-free cash and want to ring fence that the best they can.” The pension freedoms that took effect in April 2016 have boosted the popularity of Sipps, yet cash returns could be about to plunge. The possibility arises from the European banking rules known as Basel 3. As of 1 January banks must hold 100 per cent of instant access cash and make it available within 30 days. That means they can’t make interest by lending it out on behalf of Sipp providers. The effect on Sipps depends on the PRA’s view as to how banks must treat Sipp deposits in terms of the capital they have to set aside. The final decision on this is due in the spring, with the possibility of all payments ceasing. Banks are already cutting their interest rates on Sipp cash accounts and the PRA decision could see them slashed to zero. The detail is technical - but the impact could be significant. One firm, Barnett Waddingham, has estimated that Sipp investors could lose a total of £50m in lost interest. David Boyd, director at Paisley-based Monument SSAS, said: “Even if the decision is favourable, it will be interesting to see how keen banks are to increase the rates. Many Sipp providers will find it difficult to totally absorb this loss of income and fees will increase, this plus the capital adequacy requirements coming into force in September it may push smaller providers out of the market.” Investors will only be badly hit if they hold too much cash in their Sipp. Tom Munro, owner of Tom Munro Financial Solutions in Larbert, said there was no good reason to retain large amounts of cash in Sipps for a long period. “The only reason a Sipp cash account exists is to manage short-term cash flow requirements such as setting aside funds for regular income payments and fees,” he explained. “Sipps allow complete freedom to invest in virtually any asset class, so if some investors feel they are being ripped-off on deposit interest, they are holding far too much cash for all the wrong reasons, and possibly the wrong Sipp.”